"This is clearly a devastating decision," Spinola tells GlobeSt.com. "It's going to have a dramatic effect on people looking at whether to invest in residential property or upgrade the properties. It puts a chilling thought into the minds of every investor, financial institution and building owner that a court can come in and change the rules."

When Roberts vs. Tishman Speyer Properties was argued before the state's highest court last summer, REBNY filed a letter to the court in support of the state Division of Housing and Community Renewal's opinion that former owner MetLife and the current ownership, a joint venture of Tishman Speyer and BlackRock Realty, acted properly in raising rents on deregulated units while getting J-51 benefits. "We believe that the DHCR made the right interpretation, and that you do not change the rules in the middle of the game," Spinola says.

He adds, "Our argument also was that nobody was hurt. People rented apartments for whatever they paid for them; they agreed to those rates and they had the financial capability to pay them. Now, because of a lawsuit, they're being handed a winning lottery ticket."

Rosenberg & Estis attorney Jeff Turkel, who similarly filed a brief supporting the JV's actions, tells GlobeSt.com the Court of Appeals ruling is "not a decision that necessarily cuts across the board. But for those landlords who are impacted by it, clearly it's pretty devastating" and is likely to curtail participation in the J-51 program.

Turkel says these owners "might find their rent rolls reduced by 10%, 20%, 30%, 50%, depending on how many apartments they deregulated in the building and what percentage of the rent roll those apartments comprised. They may find that they're no longer able to make payments on their debt. The ripple effect is that the banks who made those loans are going to be hurting as well."

The specter of possible default looms on the $3 billion in CMBS loans outstanding on the 80-acre apartment complex--although all are current at the moment. In a note to clients, Trepp Inc. comments that should the loans go into special servicing, "we doubt that the servicer will want to be on the hook for a hit that could exceed $6 million each month--before the impact of any potential rent reductions. We would expect the servicer to move quickly to take steps to avoid having to face this severe outlay each month. For the WBCMT 2007-C30 deal, which has $1.5 billion in exposure to Stuy-Town, this could create interest shortfalls for 10 or more classes."

The CMBS information provider says it would expect "an appraisal reduction to be placed on the loan very quickly." Trepp notes that a number of CMBS loans were made "with this same business model." In all, there are 28 affected loans representing 21 properties, 17 of which are in New York. Some, including Stuy-Town, are involved in multiple CMBS issuances.

Similarly, Sam Chandan, president of Real Estate Econometrics, tells GlobeSt.com that the financial implications here "are more far-reaching than this specific transaction and the impact on the companies involved." A default of this magnitude and visibility, Chandan says in a note to clients, "has implications for a broader class of investors' perceptions of risk in holding CMBS exposure. As a result, it has a potentially chilling effect on current efforts to reignite securitization activity and liquidity in secondary markets."

Chandan adds that some investors will see the potential default as "a result of systemic issues in the CMBS market that have yet to be properly addressed and not an asset-specific issue. While another default of this scale may not be imminent, there is a very large pool of securitized mortgages outstanding that has been subjected to far less scrutiny."

Instant Insights /

Stuy-Town Ruling Could Have Ripple Effect

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